The market’s main trend remains up, but the crosscurrents are getting fierce! So today I’m selling four stocks (two for good profits and two for small losses), all in an effort to keep the portfolio full of stocks whose potential upside justifies their potential downside.
As to this week’s recommendation, I’m happy to say that it’s a company headquartered in India, which is relatively free of the political turmoil that’s gripped the U.S. recently. Furthermore, given that foreign stocks have underperformed dramatically this year, I’m optimistic about getting on board somewhere near the beginning of a renewed uptrend.
Cabot Stock of the Week 217
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NAFTA is out and USMCA is in, which seems like a win for North America—particularly U.S. dairy farmers. But in today’s Cabot Stock of the Week, I’m looking farther afield, to India, and the main reason is this: Foreign stock markets have had a terrible year in general, trending down since they peaked in January, and the selling has been so pervasive that I’ve been thinking that the selling has been overdone in many good stocks.
So when Paul Goodwin of Cabot Emerging Markets Investor recorded his first technical buy signal of the year just last week, I took notice and looked around for a healthy-looking stock. Well, I didn’t find one, but I did find a healthy business with a relatively low-risk stock that is almost certain to resume its uptrend soon, and that’s my recommendation today. Here are Paul’s latest thoughts.
WNS Holdings (WNS)
India-based WNS Holdings is an information technology company that offers business process outsourcing (BPO) for global clients in the banking, financial insurance and travel industries. The company has more than 36,000 employees in its 54 delivery centers in China, Costa Rica, India, the Philippines, Poland, Romania, South Africa, Sri Lanka, Turkey, the U.K. and the U.S. Its more than 350 clients benefit from WNS Holdings’ expertise in customer care, finance and accounting, human resource solutions, research and analytics and industry specific back-office and front-office processes. The secret of WNS Holding’s success seems to be a combination of vertical (industry-specific) expertise combined with top-notch outsourcing skills that makes its consultants a valuable part of a client’s business.
Diversification across both sectors and geographies is one key to WNS Holdings’ consistency. The company got 26% of its fiscal 2018 revenue from insurance clients, 19% from the travel & leisure industry, 18% from the manufacturing/retail/media/entertainment sector, 15% from healthcare businesses, 9% from utilities and the rest from other sectors. North American clients contributed 41% of revenue, the U.K. 34%, Australia 9% and the balance came from the rest of the world.
BPO has been a key market for Indian companies for a long time, and WNS Holdings has been at it since 1996, increasing its diversification and stability all the while. The company has grown earnings in 12 of the last 14 years, including a 29% jump in fiscal 2018, which ended in March. After four years of single-digit revenue growth, revenue also popped higher by 26% in fiscal 2018.
WNS Holdings is a fairly defensive pick, as we acknowledge the general uncertainty about the economic health of China due to the evolving trade dispute with the U.S. While the company is headquartered in India, its fortunes are not tied to a specific country or region. There is likely to be plenty of growth happening to at least part of the company’s client base at any time.
And the chart for WNS is another big selling point. While emerging markets have been breaking out in a hot sweat over the last couple of months, WNS has been rock steady. The weekly and daily charts show that there has been plenty of volatility, but all pullbacks are short (the longest being a six-week correction to end 2017), with buyers moving back in quickly. The stock hit an all-time high in July, which is a very good thing relative to most emerging market names.
WNS Holdings reported its fiscal first quarter results on July 19, with analysts expecting revenue of $193.6 million and earnings of 51 cents per share. The actual numbers came out at $200 million in revenue, with earnings of 59 cents per share.
Despite the robust beat on both the top and bottom lines, WNS pulled back after that earnings report, dipping from its high of 54 to a low of 48 on July 30. But it’s the stock’s behavior since that pullback that makes it really interesting. Through August and September, WNS has traded sideways in a tightening range, basically trading flat with support at 50.
With a reasonable P/E ratio of 22, WNS is buyable here or on any normal weakness that pulls it below 50. The longer the stock trades sideways and flat, the greater the likelihood that it will enjoy a long run when the next catalyst for bullish behavior arrives. The company hasn’t announced its fiscal Q2 earnings report, but it will likely come out in the third week of October.
WNS Holdings (WNS)
Godrej & Boyce Complex
Gate 4 Pirojshanagar Vikhroli West
Mumbai 400079
India
http://www.wns.com
CURRENT RECOMMENDATIONS
The Dow was up big today, but I’ve been seeing increased erosion in this portfolio, as investors rotate out of higher-risk stocks and into more secure names. So today I’m selling four stocks, two for good long-term profits, and two for smaller losses. The goal, as always, is to cultivate a diversified portfolio of stocks so that downside risk is commensurate with upside potential, and these “adjustments,” like all my adjustments, are made with that end in sight. Details below.
Carvana (CVNA), originally recommended by Mike Cintolo of Cabot Growth Investor, is revolutionizing the experience of buying a used car and rolling out new stores fast. But the stock has been soft for the past month. Last week I mentioned that one of my selling guidelines says that once you have a substantial profit, you shouldn’t let the market take back more than half of it—and for us that level is 58.6, which was eclipsed as the stock fell out of bed this afternoon. That means it’s time to sell and take the profit. SELL.
CSX Corp. (CSX), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth portfolio, is a railroad operator benefitting from both process improvements and the strength of the U.S. transportation sector. In her latest update, Chloe wrote, “CSX is the third-largest U.S. railroad and recently underwent a major transformation, switching to a point-to-point system that boosted margins, cash flow and profits. CSX has paid dividends every year since 1981, and has increased the dividend for eight years in a row. Over the past five years, the dividend increases have averaged 8%. CSX only yields 1.2% at current prices, but the company’s payout ratio of 25% leaves plenty of room for growth. The stock is not undervalued, but it’s in a strong uptrend that is likely to continue as long as transport stocks and the broad market remain strong.” BUY.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, remains promising. In her latest update, Crista wrote, “DowDuPont intends to break up into three companies by June 2019.
• The agriculture division of DowDuPont will be called Corteva Agriscience and will be spun off by June 1, 2019.
• The specialty products division of DowDuPont will be called DuPont and will be spun off by June 1, 2019. DowDuPont CEO Ed Breen will become CEO of DuPont.
• After Corteva Agriscience and DuPont are spun off, the remaining materials science division of DowDuPont will be called Dow Chemical. DowDuPont executive Jim Fitterling will become CEO of Dow Chemical.
“As the separated companies compete head-to-head with their various industry peers, DowDuPont management expects the share prices to rise, in accordance with normal industry stock valuations. DowDuPont is currently expected to see strong EPS growth rates of 23.2% and 16.7% in 2018 and 2019. The corresponding P/Es are 15.5 and 13.3.
“News of higher ethane prices – a feedstock for various DowDuPont products – pushed DWDP down to the bottom of its 2018 trading range last week. This is a perfect time to buy low on DWDP and lock in a slightly higher yield than was offered in recent weeks. I expect additional capital appreciation in 2019 as the spin-offs take place.” BUY.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, continues to work on building a bottom in the 34 area. In her latest update, Chloe wrote, “GM managed to find support a couple weeks ago but is still very choppy and near the bottom of its trading range. I moved the stock to Hold earlier this month and will keep it there for now. While sales are expected to fall this year, 2019 should bring a return to growth, and the longer-term potential of GM’s autonomous driving and ride-sharing investments is big—and should draw new investors into the stock.” HOLD.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is a virtual bank that’s the leading provider of prepaid cards, debit cards, checking accounts, secured credit cards, payroll debit cards, consumer cash processing services, wage disbursements and tax refund processing services. The stock has been riding its 25-day moving average higher over the past two weeks, and still looks like a decent hold. HOLD.
GrubHub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, sold off sharply two weeks ago but has been riding its 50-day moving average higher since. In his latest update, Mike wrote, “We moved GRUB to Hold in last week’s update given its volatile day-to-day action, and shorter-term, the next move is still up in the air. Still, we’re pleased to see shares hold their 50-day line Monday morning and bounce back since; the odds still favor the next major move being up. Part of that long-term conviction stems from the company’s continued moves to lead its industry—yesterday morning, the firm announced the acquisition of Tapingo, one of the leaders in on-campus online food ordering thanks to more than 150 college campus partners. (The purchase price was $150 million, with a Q4 close likely.) If you own shares at higher prices, a stop in the high 120s makes sense, but if you have a good profit, we’d just sit tight and give the stock room to consolidate.” HOLD.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio and now in her Growth & Income Portfolio, fell out of its recent trading area today and looks to be headed for support around 21, so while part of me argues for cutting the loss short, a louder voice argues that holding patiently will see Crista’s vision come true. In her latest update, she wrote, “”Revenue growth largely stems from expansion in Asia and Europe, while rising operating margins are contributing to multi-year earnings per share (EPS) growth. Wall Street expects EPS to grow 55.7% and 22.0% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 20.8 and 17.0.” I will, however, downgrade the stock to Hold. HOLD.
Huazhu Group Limited (HTHT) (previously known as China Lodging Group) was originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and now it’s one of the Heritage Stocks in this portfolio, which means that I’ll hold through periods of poor performance to benefit from the positive long-term fundamentals. The stock rallied strongly over the past two weeks and gave back part of that gain today. HOLD.
Instructure (INST), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, has fallen from 42 to 34 over the past three weeks. And Tyler has stuck with it, writing in his latest update, “We never had a huge gain here, and we’re moving back toward break-even.” But I now have a growing loss and not enough reason to stick with it, so I’ll sell. SELL.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, released an excellent third-quarter earnings report last week. Revenues grew 14% from the year before to $1.3 billion (analysts had expected 13% growth), while earnings per share were $1.30, up 53% from the year before (analysts had expected 17%). The stock sold off initially in response, but quickly reversed course, and today broke out cleanly to new highs! If you don’t own it, you can still buy here. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has lost its momentum, so it’s time to part company and take our profit. Here’s what Mike wrote in his latest update. “We’re going to sell PayPal (PYPL), which is a fine company but hasn’t really been a leader for most of this year and has suffered many waves of big-volume selling in recent weeks. We’ll take our solid profit.” So will I. SELL.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has pulled back a little further to 27. In her latest update, Chloe wrote, “STAG got hit by the selloff in REITs this week, and has fallen below its 50-day line. But the stock is still only 5% off its recent all-time high, and well above its 200-day. If interest rates continue to rise this could turn into a larger correction, or a consolidation like the one we saw at the end of last year. If that’s the case, we could take some profits. But for now this looks like an ordinary pullback, so I’ll keep STAG on Buy for now.” BUY.
Stitch Fix (SFIX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, reported its fiscal fourth-quarter results yesterday after the close. Revenues were $318 million, just short of analysts’ estimates, while earnings per share topped analysts’ consensus of $0.04. But the stock sold off sharply because the number of active clients, which was expected to hit 2.8 million, stagnated at 2.7 million, raising fears that the company was having trouble holding onto its core customer base—and also fears that Amazon’s new competing service will cut into the market. News that the company would expand into the U.K. by the end of the year was not reason enough for many traders to stay. So what comes next? Probably a short-term bounce, as early as tomorrow. And probably a base in the 27 region, which is not only where the stock found support two months ago but also where the stock’s 200-day moving average will be very soon. But there probably won’t be a new uptrend for many months. And for that reason I’ll sell now. SELL.
Synchrony Financial (SYF), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, and recommended here last week, is a slightly better buy today. In her latest update, Crista wrote, “Synchrony is a consumer finance company with 74.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. The company has been investing in mobile capabilities and expanding its online savings account into a full-service bank. Earnings per share (EPS) are expected to increase by 31.7% and 30.4% in 2018 and 2019 (December year end). The corresponding price/earnings ratios (P/Es) are extremely low at 9.1 and 7.0. The stock rose 10% in September then gave it all back at the end of the month. I expect SYF will continue to trade between 31 and 34 in October. My price target on SYF is 40, where the stock reached an all-time high in January.” BUY.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high yesterday and pulled back normally today. My perception is that buying is driven by investors becoming increasingly aware of the promises of virtual doctors visits, but more will become evident on Thursday. As Mike wrote, “Teladoc’s Investor Day is this Thursday, and while we’ve learned the firm usually doesn’t update any sales and earnings guidance during these events, it’s still likely to give some details on the longer-term story and offer clarity to any new major customer wins and the size of the pipeline. Whatever the news, there’s no doubt the potential remains enormous—virtual care penetration rates remain 1% or less in the U.S., though that’s obviously increasing and Teladoc is seeing good traction with its newer offerings such as behavior health and dermatology. As for the stock, we’re very impressed with how TDOC tightened up on the weekly chart during the past month, at a time when many big winners were chopping all over the place, and then popped to new highs on good volume earlier this week. Hold on if you own some, and if you don’t, try to start a position on dips.” BUY.
Tesla (TSLA), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio; we have a fat profit, and I have confidence in the firm’s long-term growth prospects as it leads the automotive revolution for both electric and autonomous cars. As to the recent turmoil about tweets and the SEC, I was hoping that it would end with Musk having a little more adult oversight about his off-the-cuff communications, so I think it ended well, all things considered. Tesla will get a new Chairman and Musk will be free to continue to lead the company as CEO with his vision and spirit. Fundamentally, the company continues to grow rapidly; Model 3 sales were roughly 22,500 in September, up from 17,800 just the month before. And profitability is rumored to be not too far off. As to the stock, the buying and selling of traders who act on news has brought some short-term volatility, but the long-term pattern remains, with 260 the low end of the trading range and 390 the high. HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to build a base between 275 and 290 as its 25-day moving average approaches. If you haven’t bought yet, it’s not too late. BUY.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, continues to work to get above resistance at 51. In her latest update, Crista wrote, “Voya is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. The company will host an Analyst Day on November 13, which could easily generate new and bullish research reports for Voya. The biggest question among institutional investors is whether Voya might sell its life insurance division; it’s not a problematic piece of the company, although the life division might be sold if an attractive price is offered. VOYA is an undervalued aggressive growth stock. Wall Street expects Voya’s full year EPS to grow 123% and 24.5% in 2018 and 2019. The corresponding P/Es are 11.6 and 9.3. VOYA appears capable of surpassing upside resistance at 51 soon, at which time it will likely retrace 55, where it traded earlier this year.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED October 9, 2018
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